There is a rather amusing story at the Financial Times tonight, “Credit card reforms ‘to cost banks billions’”.
Let’s look at the particulars. The story is based on a study by law firm Morrison & Forester which concluded that banks will suffer a world of hurt if they are forced to give up practices like universal default (jacking up your rates to default levels if you miss a payment from some other grantor but are current with them) and double cycle billing. The changes pending also require banks to be less punitive about late payment (you’d need to be a full 30 days late to get in trouble).
The Morrison & Forester study asserts that banks will lose $10 billion in interest annually, reduce credit lines by $931 billion, and put cards “out of the reach of 45 million customers.”
Now let us consider a few things:
1. Why, pray tell, is Morrison & Forester, a San Francisco law firm, the author of this pro-industry tale of woe? Why not one of the well-respected, brand name consulting firms (McKinsy, Bain, and BCG all have large financial institutions prictices) or one of the well regarded financial institutions boutiques, like Oliver Wyman? I cannot imagine that they have the ability to to anything more that regurgitate analyses provided by industry incumbents. Even if you were going to have a law firm rubber stamp this sort of PR effort, it might go over slightly better from a law firm known to be a financial regulatory heavyweight, like Sullivan & Cromwell or Arnold & Porter. One might hazard that the industry could not get anyone well known for banking expertise to put its name on a self-serving report like this (note I am not saying M&F knows nothing about banks; pretty much every big firm has something of a banking practice. But they are a pretty odd choice for a report aspiring to be seen as authoritative).2. That $931 billion estimate is way too precise.
3. I am willing to accept that the industry will make less when these ruses are removed. The whole point of them is to extract more dough from customers. But how much more are the credit card issuers making due to the tremendous drop in funding costs and further subsidies-in-waiting thanks to the Fed’s plan to buy asset backed paper, including securitized credit cards? The authorities have made it clear that they intend to throw their weight behind making credit cheaper to consumer via lowering funding costs. How big an offset is that to the $10 billion loss in fees and default charges that the industry is crying about? I suspect the value of the subsidy is considerably greater than what the government wants to take back via tougher regulations.
I’d like to see a proper tally of how much credit cared companies have slashed credit already. Seems that these rule changes merely give them cover for what they had set in motion already. In particularly, newbie bank American Express has been cutting credit limits right, left, and center. We mentioned that they are dropping two corporate credit line products aimed at the small business market; we’ve been told of people with eight figure net worths, pristine credit ratings and payment histories having their credit lines cut by half. A reader sent his letter to Amex to us (he stressed in his note that he pays off his balance in full every month, and since Amex charge much higher merchant fees than Visa and MasterCard, plus an annual fee, “pay in full” customers are far more attractive to them than they are to Visa and MasterCard):
I am writing to tell you about my sincere disappointment with my recent service from American Express. I have been an American Express card member since 2003. I put almost everything on my Amex. I charged and paid-off $91,000 dollars on my card in 2007, it was an especially big year because I got married. So far in 2008 I have charged and paid off $75,000 or so on the card, I got a new job this year and relocated… This is an average of about $7,000 per month in charges and payments over the past 2 years I would think this would make me at least a decent card holder.On December 12, 2008 the credit limit on 2 of my American Express Cards was cut from a total of $50,000 (way more than I needed, since I rarely carry a balance) to $3,200 (way too low, especially in December), this is a 95% cut and about 1/3 of my average monthly charges / payments over the prior 2 years.
I was informed by email of the cuts the day they took place. A day later I was within $50 dollars of my new credit limit. Good thing I check my email, because I still have not received the paper letter, and would certainly have gone over the limit before I received it….
When I called customer service I was told that this credit limit cut was due to an elevated debt/credit ratio reported on my credit report. I believe this is due to a few 0% teaser rate cards that I had near full balance, and I actually recently paid them all off since the teaser rates are up at the end of the year. I was using these 0% things quite often, and I guess it is hurting my score. But I have never had a late payment with Amex, or any other creditor. However, I feel all of this is beside the point.
I think it is unacceptable that I was not contacted before this 95% reduction in my credit limit. There was no attempt to “underwrite” my account, no request for income or financial information, nothing… I was quite upset and decided to call customer service to see what I could do about it.
I called customer service and told them that this limit was too low and that even though I pay the card off every month, I would not be able to use my card the way I normally do. I told them I would be glad to supply whatever underwriting information they needed so my account could be re-evaluated and my limit increased to a level that was at least above my average monthly spending.
No luck, I was told that there was nothing that could be done, and that the account would be reevaluated in a few months, and that if my debt to credit ratio was better I may be able to get an increased limit. I spoke with a supervisor and told them that I would be forced to stop using my Amex as my primary card if I only had a $3,200 limit. They did not seem to care either, and told me that there was nothing that could be done….
I guess the same “model” that was convinced a needed a $50K limit last year is now convinced that I am a “high risk” customer. Oddly enough, my personal financial situation has improved over the 5 years that I have been a card holder. American Express would not know this since they have never requested any financials from me. It is hilarious to me that big financial institutions are making the same mistakes that got them into this mess only in the other direction… Apparently they still think the credit report knows all…
I understand that these are different times and that the economic situation is forcing business to change… etc. But, I do not think these types of actions toward long standing good customers are intelligent or warranted. I think that when we come out of the other side of this “credit crunch” environment American Express will have lost a lot of customers and a lot of revenue. It has certainly lost my respect, will lose my business.
If anyone at American Express who cares about my business sees this letter please feel free to contact me, and convince me to remain a card holder.
The key point is buried in the letter. American Express (and one presumes other card issuers) is so operationally rigid that they will consider ONLY credit bureau information. Having suffered two major credit bureau screw-ups, I hold them in very low esteem (one was all three bureaus literally mingling another person’s info with mine, the very fact that the report showed two Social Security #s should have been a tipoff to them, the other was a complete screw up by Citibank that they bent over backwards to correct, Citi could not have been more diligent, but in each case it took more than a year to get the record corrected, and in the first case, it took a nastygram from my lawyer to get them to take action),
While I can see that some customers may be too small to warrant the cost of verification of income, the one above was a pretty healthy spender. At a minimum, you could come up with review processes that most customer would decide was to much fuss (”your income would need to be at least X, and we need three years of tax returns, and a current pay stub”) but would at least leave them feeling they hadn’t been treated so badly. Note the letter writer also felt he had been treated badly by the customer service rep. Just having them be super apologetic would have been smarter.
American Express has spent a small fortune on brand image. Wonder how much they are going to tarnish it with crudely-implemented credit reductions.
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Attacking one’s customer base is generally considered a bad idea, but AE seems to have adopted this strategy. Somebody in the company must be frightened.